The Truth Behind The Cash-For-Clunkers Subsidy

After several weeks of waiting and much speculation by the press, the United States has decided to join Germany, France, Brazil and China in offering a taxpayer subsidized automotive purchase plan to stimulate the ailing auto industry. The Consumer Assistance to Recycle and Save Act (also known as "cash for clunkers") offers a taxpayer-funded electronic payment to participating car dealers.

Generally speaking, the program will subsidize the purchase of a new vehicle to the tune of $3,500 if your old car got no more than 18 miles per gallon and your new one gets at least 22. The subsidy jumps to $4,500 if the new vehicle is at least 10 miles per gallon more fuel efficient than your old one. While this sounds great, the devil is in the details. (Get the best price when selling your used car, read Top 10 Ways To Get Top Dollar For Your Car.)Not Ready to ShopDespite all the hype, the program won't become a reality until 30 days after the president signs it into law. Assuming Obama signs it quickly, the first time it will have any impact for consumers is probably sometime in August. Even then, the program will only have a limited impact on vehicle sales and an even more limited impact on the reduction of greenhouse gasses. (Learn about green investing in What Does It Mean To Be Green?)

Trade-in vehicles must be no older than 1984 models, which means the oldest, most broken-down, gas guzzlers don't qualify. Furthermore, for the trade to be worthwhile for the consumer, the trade-in vehicle must be worth less than the amount of the government subsidy. For example, the owner of a 2005 light pickup that gets 16 miles per gallon would have no incentive to trade it for a 2010 Ford Ranger that gets 22 miles per gallon because the old truck has a blue book value in excess of $10,000. Trading in that truck would net only $3,500 from the cash-for-clunkers subsidy, a net loss of $6,500.

Because trade-in vehicles will be scrapped, auto dealers can't pay anything for them in terms of resale value, so owners of later model vehicles are unlikely to find the cash-for-clunkers program to be worthwhile. (Read more about government intervention in What Is Fiscal Policy?)

Wording ComplicationsFurthermore, on the topic of details, a sampling of the language from the bill reveals additional complications, particularly as it pertains to trucks, as they are classified in three different ways with separate rules that apply to each category:

$3,500 Value. The voucher may be used to offset the purchase price or lease price of the new fuel efficient automobileby $3,500 if:

a) the new fuel efficient automobile is a passenger automobile and the combined fuel economy value of such automobile is at least four miles per gallon higher than the combined fuel economy value of the eligible trade-in vehicle;

b) the new fuel efficient automobile is a category one truck and the combined fuel economy value of such truck is at least two miles per gallon higher than the combined fuel economy value of the eligible trade-in vehicle;

c) the new fuel efficient automobile is a category two truck that has a combined fuel economy value of at least 15 miles per gallon and: (i) the eligible trade-in vehicle is a category two truck and the combined fuel economy value of the new fuel efficient automobile is at least one mile per gallon higher than the combined fuel economy value of the eligible trade-in vehicle; or (ii) the eligible trade-in vehicle is a category three truck of model year 2001 or earlier; or

d) the new fuel efficient automobile is a category three truck and the eligible trade-in vehicle is a category three truck of model year of 2001 or earlier and is of similar size or larger than the new fuel efficient automobile as determined in a manner prescribed by the Secretary.

$4,500 Value. The voucher may be used to offset the purchase price or lease price of the new fuel efficient automobile by $4,500 if:

a) the new fuel efficient automobile is a passenger automobile and the combined fuel economy value of such automobile is at least 10 miles per gallon higher than the combined fuel economy value of the eligible trade in vehicle;

b) the new fuel efficient automobile is a category one truck and the combined fuel economy value of such truck is at least five miles per gallon higher than the combined fuel economy value of the eligible trade-in vehicle; or

c) the new fuel efficient automobile is a category two truck that has a combined fuel economy value of at least 15 miles per gallon and the combined fuel economy value of such truck is at least two miles per gallon higher than the combined fuel economy value of the eligible trade-in vehicle and the eligible trade-in vehicle is a category two truck.

Legalese TranslationTranslated, that legalese means that trading in your clunker for a big truck is a great deal, even if your clunker gets only one mile per gallon less than the giant new ride of your dreams. With those standards, the reduction in greenhouse gasses is something less than desired. The average fleet fuel efficiency standard for 2009 is 25 miles per gallon (27.5 mpg for cars and 23.1 mpg for trucks). The requirement by 2016 is 35.5 miles. Full-size pickups and SUVs, which will disproportionably benefit from the cash for clunkers program, average in the range of 20-24 miles per gallon. (Don't let corporations greenwash their dirty laundry. Learn how to spot a phony, read The Green Marketing Machine.)

Act FastAt the bottom line, this program is a great deal if you are driving a hunk of junk and want to upgrade. The program authorizes $1 billion that must be spent by October 31, 2009, so head to the auto dealer 30 days after the ink from the president's pen dries. To read the full text of the Consumer Assistance to Recycle and Save Act, go see pages 52-57 of H.R 2346.